EUR 850.00 For Business Accounts Only

Morningstar | Synchrony's Higher Growth Offset by Lower Net Interest Margins

No-moat Synchrony produced a quiet second quarter that was modestly ahead of our expectations. While Synchrony reported loan growth of 4% from the previous year, loans grew 17% excluding Walmart. Synchrony’s PayPal portfolio appears to be filling the gap that will be left by Walmart in October. For the quarter, the company earned a $1.24 per share, as credit provisions declined 6% from the prior-year period. Offsetting this was net interest margin that took a 33-basis-point hit from the previous quarter. Management attributed the decline in net interest margins to the lower yielding PayPal portfolio. For fiscal 2019, management guided to NIM’s of 15.75%-16%. Right now, Synchrony is at the bottom of its guidance range. Given Synchrony has grown deposits by more than 11% from the prior year, we would anticipate that in the near term NIM’s are pressured. During the quarter, the company repurchased 2.9% of its shares with plans to repurchase another $4 billion worth once the sale of the Walmart portfolio is completed. As of the July 19 Synchrony share price, a $4 billion repurchase would account for more than 16% of the company’s outstanding shares. For now, we do not anticipate any material changes to our fair value estimate of $32 per share.

During the period, Noninterest expense was up 8.6% from the previous year as professional fees, marketing, and information processing grew 30.5%, 22.7%, and 24.2%, respectively. Management attributes this to the onboard of PayPal. We’d actually be fine if the company decided to keep these expenses. Long term, we think the company could probably benefit from spending more on its tech, but it would impact margins over the medium term.

Synchrony management took this quarter’s earnings call as an opportunity to promote its ongoing technology initiatives. Since our deep dive into Capital One’s technology, “Capital One: A Moat in Tech That Vikings Can’t Surmount,” we have not viewed Synchrony’s technology favorably. So far, most of Synchrony’s innovations appear to be targeted at cardholders, as opposed to the retailers that will be partnering with Synchrony. In addition, the technology initiatives new president Brian Doubles mentioned were around e-statements, applying for credit online and SyPi, its retailer plugin. To us, these aren’t significant improvements from what the company has been doing. In addition, SyPi has been around for nearly three years.

When we review Synchrony’s LinkedIn page, we do see the company now has 646 IT function related employees. This is an improvement from September 2018, when the company had only 556 employees. That said, it doesn’t appear the company has done much hiring in information technology. According to LinkedIn Insights, Synchrony has seen only 1% growth in information technology headcount over the last six and 12 months. It’s possible that Synchrony has changed existing employees’ roles. Regardless, we think the company needs to invest more in its IT infrastructure if it wants to remain competitive.